Question

3. Explain the difference between exchange efficiency and production efficiency.

Answer 1

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Question:

Answer:

Exchange efficiency:

Both concepts exchange efficiency and production efficiency are totally different than each others. Exchange efficiency occurs when, for any given bundle of goods, it is not possible to redistribute them such that the utility (welfare) of one consumer is raised without reducing the utility (welfare) of another consumer.In the simple term term i will explian with an example- suppose there are two products apple and orange and there are two person- person A (have apples) and person B (have oranges). Both the people A & B will exchange exchanging apple for orange. Both the party will exchange with each others untill one's welafare or will negatively affected or getting worse off. When a person (suppose A) think that its welfare is reducing or getting worse off due to this exchange then A will stop exchanging with person B.

Production efficiency:

Production efficiency is related to distribution of inputs (factors of production) for producing products. Production efficiency occurs when the available factors of production are allocated between products in such a way that it is not possible to reallocate the production factors so as to raise the output of one product without reducing the output of another product.We all know that the firms or a economy has limited resources and allocate these resources for producing the required products. Suppose the economy is distributed their factors of production in producing healthcare facility and education. Now suppose due to any reason the demand for healthcare facility increase but the country has limited resources that have already distributed among the production or producing of healthcare and education. So, to fulfill the increasing demand of the healthcare facility the economy/country will decrease the producing the education facility.

Conclusion:

The exchange efficiency is related with the exchange of goods and services and the  production efficiency is related with distribution of factors of productions. In both the cases it is not possible to redistribute them such that the utility (welfare) of one consumer or production of another product is raised without reducing the utility (welfare) and production of another consumer and product respectively.

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